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Detroit debt fix won't end budget pain

Detroit isn't out of the woods, yet.

Friday's bankruptcy court ruling by Judge Steven Rhodesapproving a complex restructuring of the city's $18 billion pile of accumulated debtends one of the most costly and contentious chapters in the city's long-running financial decline.

Despite continued appeals from city pensioners, Rhodes said the plan to exit bankruptcy is reasonable, adding the agreement "borders on miraculous."

"Today we secured a brighter future for Detroit's tomorrows and for Michigan's tomorrows," Michigan Attorney General Bill Schuette said in a statement, adding that "Detroit and Michigan are stronger and safer."

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City officials say the 15-month legal proceeding gives Detroit an historic chance to reverse decades of decline brought by the collapse of its industrial economy, and the exodus of businesses and residents sparked by a deterioration of city services.

But emergency manager Kevyn Orr, who took Detroit into bankruptcy, warned the city will be on a "little bit of a diet for awhile."

Jeff Kowalsky | Bloomberg | Getty Images

That may be an even bigger understatement.

Although the ruling lifts a huge debt burden, it remains to be seen whether the city can restore services; attract new businesses and homeowners; and set itself on a sustainable path for the future.

"Detroit has a core problem with its revenues. They've been in decline for years," said Lisa Washburn, a municipal finance analyst with Municipal Market Advisors. "This bankruptcy has not done anything to address that issue. It's all built around the idea that—hopefully—there will be people that will come back to the city."

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To be sure, the plan approved by the judge removes a heavy load from the city's budget by cutting the cost of long-term liabilities.

Under the terms of the deal, negotiated with unions, creditors, bond insurers, among others, the city will cut some payments to investors and retirees. The deal also sets aside funds to try to rebuild its battered infrastructure and restore badly needed services.

Highlights of the 1,600-page plan include:

Pension cuts: Despite dire pronouncements early in the process, city workers and retirees were spared some of the deepest cuts in retirement benefits. Police and fire department retirees will get smaller cost-of-living increases; general pensioners will see their checks cut by 4.5 percent, no cost- of-living increase and a "clawback" of some annuity payments. Both will see big cuts in their health-care benefits.

Creditors: Holders of so-called "general obligation" bonds will get between 34 to 74 cents on the dollar, depending on the type of issue. Two major bond insurersamong the longest holdoutswill get 14 cents on the dollar in cash, along with a series of property development rights and leases on other city property.

Detroit Institute of Art: Despite pressure from creditors to sell its vast art collection to settle debts, the institute's holdings will be transferred to a private trust as part of an $816 million deal financed through private donations and $150 million in state aid. That money was raised to offset deeper pension cuts.

Reinvestment: The plan also sets aside $1.4 billion that the city will use to try to jump start its economic revival. The effort includes restoring critical services, including increased spending for police and fire departments, tearing down vacant homes in blighted neighborhoods and upgrading the city's ancient computer systems. The city is also projecting additional cost savings, which could boost the reinvestment plan to $1.7 billion.

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Those investments are intended to reverse years of erosion in city services and deal with a large inventory of abandoned properties. That may help Detroit residents, who have been coping with substandard services for years, but it's not clear it will persuade businesses and families to return.

The plan offers little relief for the city's financially strapped school system, for example, which has seen its budget cut by more than half in the past decade, as its deficits nearly tripled. That's sparked a huge decline in enrollments as student fell to suburban districts or charters schools. That's left the district with even less funding.

Fixing Detroit's schools will be just one of the challenges faced by city officials as they begin navigating an uncertain course to arrest the city's decline and begin rebuilding. While the completion of the bankruptcy plan removes a major hurdle, it marks only the beginning of a long-term process that has yet to be fully spelled out.

Until that work gets underway, the city will face an ongoing challenge attracting new business investment and home buyers, said Washburn of Municipal Market Advisors.

"If you have services that just passing muster and school system that's dysfunctional, drawing a lot of people in to stay long term, it's not a foregone conclusion that that's going to happen," she said.